Lockhart: Fed May Ease Further If Economy Weakens

The Federal Reserve could ease monetary policy further if economic conditions deteriorate, and should not rule out any policy options, Atlanta Fed President Dennis Lockhart said Wednesday.

The U.S. economy remains disappointingly weak and risks to the recovery have risen, Lockhart noted, but the country will probably not face a renewed period of contraction.

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``In more adverse scenarios, further policy accommodation might be called for,'' Lockhart told an event sponsored by the Greater Lafayette Chamber of Commerce. ``But as of today, I am comfortable with the current stance of policy.''

Lockhart said it is the Fed's current policy to keep its balance sheet at a record $2.9 trillion for ``the foreseeable future,'' though he warned that monetary policy was not a cure for all economic ills.

Arguing that recent U.S. economic weakness can no longer be explained away by purely temporary factors, Lockhart pointed to the job and housing markets as key sources of trouble.

``While the risks have increased, I do not expect a recession,'' Lockhart said.

In response to a deep recession, the Fed slashed interest rates to effectively zero and engaged in an unprecedented program of asset purchases to push down long-term rates.

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Still, the economy's performance has remained disappointing, with growth averaging less than 1 percent in the first quarter, and the unemployment rate stuck above 9 percent.

``Slack in our economy is rising even though we are technically in recovery,'' Lockhart said.

Lockhart said consumer spending has remained weak, despite a stronger-than-expected increase in July. Job worries and a depressed housing market are contributing to consumers' reluctance to shop, he said.

Overall debt levels in the economy have barely changed, Lockhart said, noting that private sector deleveraging had been accompanied by a sharp rise in government borrowing.